STEP BY STEP GUIDE TO:

OPTIMISING YOUR SAVINGS WHEN MOVING TO ISRAEL from the UK

The Fundamentals of Investing

Simon Benarroch
Investment Manager & Branch Principal

Raymond James Investment Services, Suite 9, Arkleigh Mansions,
843 Finchley Road, London NW11 8NA
Email:  simon.benarroch@raymondjames.com
Tel:  +44 (0)20 8202 1944 Fax:  +44 (0)870 123 1944
www.RJIS.co.uk  

The decision to move to Israel is not easy; there is so much to consider.  This booklet has been designed to be of benefit to everyone who needs guidance on how to best arrange their finances [and savings] before making such a life changing decision.
 
This booklet is intended to help people through the maze of financial instruments and jargon that is prevalent in the Financial Services industry.

It is hard enough for people living in England to safely manage their financial affairs whilst making sure that they invest wisely and tax efficiently. When moving to another country there are many more factors to consider, not least the tax regime of the country to which you are moving.

You may be aware that the tax rules in Israel have been radically overhauled in the last few years and it is imperative you that you take professional advice before embarking on Aliyah.  Making the wrong investment decisions can be very costly.  However, by taking the time to undertake some financial planning before leaving the UK, you may save thousands of pounds in unnecessary taxes.

This pamphlet touches upon some of the numerous financial issues and decisions that need to be taken when making Aliyah.  It has been written as a step by step guide to assist you through the numerous questions that may arise as you contemplate moving.  It is not designed to replace expert advice but merely to provide you with some basic information that you may or may not have thought about. Please do not make any financial decisions based on this booklet alone.

There are a number of questions that you must ask yourself before moving:

Qu      Do I keep my savings in Sterling and keep them here or do I change to Shekels and take them with me?

Ans     The answer is that there is no definitive answer to that question.  It largely depends upon your circumstances but to help you here are some pros and cons for keeping your money in Sterling:

Pros

• Simplicity - you understand the currency and think in Sterling
• Stability – Sterling  has a history of being a stable currency
• Appreciation - over time the pound has appreciated against the Shekel therefore in the future Sterling could be worth more
• Return to England - should you decide not to stay permanently in Israel your money is still in Sterling

Cons

Currency fluctuations - the pound could depreciate and be worth less in the future  Currency risk - Your savings are in a different currency [pounds] from what you are spending [shekels]

Conclusion

Generally speaking the stability of Sterling tends to be the deciding factor.
                                                                                        
Qu      Should I keep my private residence and rent it out or should I sell and invest the proceeds?

Reasons to Keep UK Property

• Property has been an excellent investment in the past, especially in the last few years
• Rent produced from the property can be used as source of income
• There would be a UK property to live in if things do not work out long term
• Property should be a good ‘hedge’ against inflation

Reasons to sell UK property

• Property has recently risen dramatically in value but will it continue?
• Managing property can be time consuming and stressful when based in the UK and this is even more so when you are based abroad
• Paying management fees can be costly
• Overheads, repairs and vacant periods reduce returns
• UK property is subject to UK inheritance tax at 40%
• Non liquid asset – money can’t be released quickly or easily should you need it
• Rental income subject to ongoing UK tax
• Israeli tax after five years
• HMRC could argue that you are still UK domiciled if you keep your former private residence [see section on inheritance tax]. Investment properties e.g. “buy to lets” should not affect your domicile

Conclusion

The Israeli tax treatment of rental income in future years, and the ongoing tax treatment in the UK, together with the fact that UK property would be still liable to UK inheritance tax, means keeping the property may not be the best solution for everyone.
 
Once a decision has been made as to whether to keep your house and what currency to keep your money in, it is now time to start thinking about how the money should be invested.

In order to do this there are some important questions that need to be considered:

Qu        What do you want your investments to achieve?
Qu      Do you want the highest possible income now or do you want your investments to grow so that you have a greater income in the future?
Qu      Do you want income now as well as in the future?
Qu      How much income will you need?
Qu      What is my life expectancy and is there enough money to see me/us through?
Qu      Will there be other sources of income?
Qu      Do you have enough money that you can afford to take a risk on some of it?
Qu      Can you afford not to take a risk on any of your money?
Qu      Have you considered that your UK assets are subject to 40% UK inheritance tax?

Everyone will have different answers to these questions.  This is why each individual should have their own tailor-made portfolio especially for them which takes into account their unique set of circumstances.  The portfolio must have the ability to allow changes in a tax efficient manner.  As you get older you will typically want to reduce the risk and increase the income that comes from your savings. When selecting investments, it is very important that you consider this at the outset so you have the flexibility built in to allow for changes in your circumstances. This is especially true when making Alyiah as depending on how your investments are held any changes to your portfolio will normally be taxed. There are a few ways around this that allow you to change investments without incurring tax.

The answers to the above questions will form the foundation of your portfolio and its asset mix.
A portfolio will typically hold cash, property, bonds/gilts and equities.  The answers to the above questions will determine the percentage of each of these that you will hold in the portfolio.

I believe that 90% of a portfolio’s performance is due to selecting the right asset mix. The remaining 10% of the performance is due to picking the right stock or bond. It is because of this that getting the right asset allocation is so fundamental and important. The wrong asset mix can affect 90% of a portfolios performance.

Pros   

• Capital is secure
• Easy access
• Comfort – reassuring to know you have money in the bank

Cons

• Lowest rate of return from all the asset classes
• Inflation will erode the capital and therefore, in real terms, your money decreases over time rather than increases
• Susceptible to interest rate changes therefore unpredictable income in the future

Tax Treatment - UK

UK Banks and Building Societies pay the income net of tax [after deducting UK tax].  However, once moved to Israel, you can fill out a form requesting the interest is paid gross as you are no longer a UK tax payer.  Offshore bank accounts pay gross.

Tax Treatment – Israel

For the first five years after making Aliyah you do not need to pay income tax on interest from foreign bank accounts.  After five years in Israel you will be taxed at your taxable rate.

Residential property has been covered earlier. Commercial property usually involves the purchase of either retail office or industrial units and renting them out on longer contracts.  This usually provides a consistent and predictable income for the investor.  However, just like residential property the tax treatment of the rent seems to outweigh any of the benefits therefore somebody moving to Israel should think carefully about any property holdings they have.

Tax Treatment - UK

If you are registered under the “Non-Resident Landlord Scheme” Tax should not be deducted at source. It is your responsibility to inform the HMRC of any rental income or capital gains. This income is still taxable in UK even if you live abroad.

 Tax Treatment – Israel

Bonds are IOUs to companies and Gilts are IOUs to the UK Government.   ‘Bonds’ is a loosely used term in financial services.  This should not be confused with other bonds you may come across.

When the UK Government needs to raise money, one of the ways they do so is by issuing Gilts.  An investor purchases the Gilts and the money goes to the Government.  In return, the Government pays regular interest and promises to pay back the initial investment on a set date in the future.

For example a Gilt called a, “Treasury 2015 - 5%” would mean that it pays 5% per year until 2015, at which time your initial investment would be returned to you.  This is the safest form of investment as the government would have to ‘go bust’ for it to be unable to repay the money.  Western Governments simply don’t go bust!

Bonds are exactly the same except instead of lending money to the government you lend it to a company. However you would receive a higher rate of return, because regardless of how strong the company is, there is still a higher risk of it going bust than the UK government.

If a company were to offer a bond ending in 2015 they would have to offer a return above 5% for them to attract any investors. Credit ratings are given to companies e.g. AAA, AA, BBB, and BB depending on the company’s financial strength.  The lower the credit rating, the higher the return they would have to pay in order to entice investors to lend money to them.

Pros

• Capital is fairly safe
• You have a fixed date when capital is returned
• Gilts pay gross of tax
• Bonds pay net of tax, but tax can be reclaimed
• No capital gains tax payable on Gilts/Bonds
• Reliable fixed income

Cons

• There are higher returns from other investments
• Could lose money if sold early
• Locked into fixed interest rate
• May not keep up with inflation

Tax Treatment - UK

Gilts – income tax is payable on interest from Gilts.  However, interest from Gilts is received gross, i.e. no tax has been deducted.  Capital gains are not taxed in the UK

Bonds – income tax payable on interest payments from Bonds is received net.  Non tax payers can get this back.  Capital gains are not taxed in the UK on most corporate bonds.

Tax Treatment – Israel

Gilts and Bonds - Five years income tax exemption then taxable.  Capital gains  - first ten years tax free then taxable.

Stock market investments have outperformed all asset classes since the Second World War. They have produced excellent overall returns. However this has not been achieved consistently. There have been times of large losses as well as large gains. It is generally accepted that equity based investments are appropriate for long-term growth. They will fluctuate in value but over the longer term should comfortably outperform inflation.

Pros

• Good chance of future growth
• Best performing asset class
• Liquid asset
• Inflation hedge
• Huge choice of investments
• Access to funds from all over the world
• Spreads your risk

Cons

• Can be volatile
• Should not be considered for less than five years
• Returns very hard to predict
• Perceived as high risk
• Dividend tax withheld in UK

Tax Treatment - UK

Lower rate Income tax deducted at source.  Higher rate UK tax payers will need to pay additional tax.
Gains are subject to Capital gains tax (CGT) after the personal allowance.

Individuals who are neither resident nor ordinarily resident in the UK are normally exempt from CGT (certain conditions apply and you should seek advice from an accountant) and further UK tax on dividends 

Tax Treatment – Israel

A tax credit of 10% is given on dividends. This reflects the fact that 10% tax has been paid at source. This cannot be reclaimed in the UK.  There is no further tax to pay in Israel for the first five years. After that taxable at your personal rate, however, Israel will take into consideration the 10% credit in UK and this should reduce the total tax due in Israel.

Capital tax – nothing to pay for ten years.

These have gained popularity in recent years. They used to be for the institutional market but today they have become popular in the retail market.

Qu      What is a Hedge Fund?

Ans     Hedge Funds are often unregulated.  They may employ various investment strategies in an attempt to either outperform the market or preserve capital.  This is done by purchasing financial instruments that would normally be regarded as more risky and would not typically be allowed in a regular Unit Trust. In theory this flexibility allows the Fund Manager the potential to make more money for the fund.  However, these funds are often highly geared [they invest borrowed money] which means that they are very high risk to the investor.  The investment strategy may change without any notice to the retail investor.

There is no protection from the Financial Services Authority [FSA].  The charges are usually significantly higher than regular funds.

These are generally not suitable for the average investor.

Tax Treatment 

The tax treatment can vary for each fund dependent upon the underlying assets within the fund.

Qu      I have ISAs/PEPs what do I do with them?

Ans     These are tax efficient savings vehicles that allow money to be saved tax free at the bank/building society. They can also be used to invest in stocks and bonds in a tax efficient manner. They are only available to UK residents so once you leave the country you will be unable to invest any more.

Broadly speaking, your pension income will be taxable.  The question is “Will you pay the tax in the UK or in Israel?”

During the first five years that you live in Israel, you are exempt from paying Israeli income tax on pension income.  However, if you use this exemption and do not pay tax in Israel you will be required to pay tax in the UK.  Alternatively, you can elect to pay the tax in Israel, on all or part of your UK pensions, in which case you will be exempt from paying it in the UK in respect of the pensions being taxed in Israel.

Israel has recently changed the statutory retirement age, a pensioner is now defined as a male aged 67 or a female aged 62.  Taking pension income before these ages will be considered “early retirement” and subject to slightly different tax rules.  For those over statutory retirement age the Israeli revenue ignore the first 35% of your pension income and you are only taxed on the remaining 65%, thus you may be better off electing to pay Israeli tax, rather than UK tax.

If you are below the Israeli statutory retirement age you may be taxed on all of your pension income.  In addition, there are certain circumstances where you may also have to pay Israeli National Insurance contributions on this income. 

There is an additional rule that stipulates that you will not pay more tax on your pension income in Israel than you would have paid in the country from which you came.  This applies to New Immigrants but not returning residents.

Qu      I am entitled to 25% tax free cash as a lump sum from my pension.  Should I take this before I move to Israel or after?

Ans     By taking the 25% cash before you emigrate, you will have the opportunity to invest that money for a further five/ten years free from Israeli income/capital gains. Conversely, if you take the tax free lump sum after you have moved to Israel, the income/profits from investment of this money will be fully taxable (in Israel) from the day it is invested.

Qu      Should I purchase an annuity or withdraw income from my fund?

Ans     The tax rules in Israel with regards to pension income coming from an annuity or a drawdown from the pension fund are not 100% clear, although it would seem that the Israelis will accept drawdown income as legitimate pension income.  Therefore, there are no obvious tax advantages of choosing one method over the other.  However, other considerations such as the ability to pass the fund to your spouse or heirs need to be taken into account.  Pensions advice can be fairly complex and I would urge you to seek professional help on your pension matters.

Qu      How will my pension be paid to me in Israel?

Ans     The State pension can be paid directly to you in Israel in Shekels.  This is probably the most convenient way of receiving your pension.  The money will be changed using a banking rate rather than a tourist rate.  Additionally, if you move to non-contested geographical locations (i.e. Tel Aviv) you will be entitled to the yearly inflation increases.

          With regards to non-State pensions you will need to contact the scheme administrator to confirm that they will pay direct to Israel.  

QROPS - Qualifying Recognised Overseas Pension Schemes

Under recent changes in pension legislation, there is now the opportunity to move your existing UK pension funds into an ‘overseas pensions scheme’.  There are a number of potential benefits, including greater flexibility and perhaps more favourable tax treatment of the funds.  However, the rules are very complicated and you should seek expert advice on this issue.

When building a portfolio and deciding how much income you need, remember that inflation is a savers biggest enemy. Even at today’s historically low inflation rate, inflation still eats away considerable amounts from your money‘s spending power.

Consider an income of £10,000 and inflation at only 3%. Your spending power in ten years time will be about £7,374. You will still be receiving £10,000 but you will only be able to buy the equivalent of £7,374 worth of goods. Historically Israel has had a greater inflation rate than the UK.  This needs to be taken into consideration.  

In recent years people have particularly suffered on two accounts:

1. Inflation has eroded their savings
2. Interest rates have dropped considerably and therefore income from savings has dropped.

Consider someone who retired to Israel a number of years ago and kept their money in an English Building Society earning around 10%-12%.  That same Building Society is now paying about 4%-5% which means that his/her income is significantly lower than it was. In the meantime inflation has caused prices to increase significantly.

Coupled with the fact that life expectancies have increased, it is not unreasonable to foresee a situation where retired people will simply run out of money.

Inheritance tax is a major issue that must be considered when making Aliyah.  Currently there is no inheritance tax payable on the assets of a deceased person’s estate for Israelis living in Israel.   Contrast this to the UK where after allowances the remaining assets are taxed at 40%.  Thus nearly half of your of the total wealth may go to the Taxman.

It is fairly obvious that some inheritance tax planning could save your family a substantial amount of money.

Qu      If I move to Israel will my UK assets still be subject to UK inheritance tax?

Ans     Most definitely yes.  Even if you are a non resident and in fact non domicile, the assets that you hold in the UK, even money in a bank account, will be subject to UK inheritance tax. 

Qu      If I move to Israel will my worldwide assets, including those in Israel, be subject to UK inheritance tax?

Ans     UK inheritance tax is not dependant on whether a person is UK resident but rather if they are UK domiciled. The domicile of a person is much harder to define. The normal definition is based on whether you have lived in the UK for 17 out of the last 20 years.  In which case, based on this definition, people moving to Israel still face UK inheritance tax for a number of years to come.

          However, if you can prove that you have left the UK and have no intention to return, this can override the 17 year rule.  There is no defined way to prove that you have left the UK with no intention to return. However a combination of factors should help to make it conclusive to the UK revenue that you are not domiciled in the UK and that Israel is your domicile of choice.  Some of the points that the HMRC would consider in your favour are:

• You have sold your UK home
• You no longer have any assets in the UK
• Your family lives in Israel
• You have made a Will in Israel
• You have voting rights/citizenship in Israel
• You have officially made Aliyah
• You have reserved a burial plot in Israel

This adds to the importance of thinking seriously about not keeping your family home and investment assets in the UK.  Investing in offshore territory, like Jersey or the Isle of Man, may solve some of these issues.

Even after you have established Israel as your domicile of choice you will still be deemed UK domicile for another three tax years.   Thus, in practice, your estate will be subject to UK inheritance tax for at least three years [could be longer] after you depart the UK.

As you can see optimising your savings when moving to Israel needs careful consideration and planning. 

As with any investment portfolio it is essential that you understand the risks that you are taking within the portfolio.  There are a large number of investment related risks to consider.  The risk of losing money is perhaps the most obvious but there are other more subtle risks that can greatly affect the value of your savings.  For example, inflation risk.  You know for sure that your money will be worth less in the future.  Does your investment strategy try and counter this? 

There is also interest rate risk.  The prospect that interest rates will go down and thus your income will decrease.  This risk needs to be factored into the portfolio.

You must have a plan!

You have to establish how much income you need.  You should also establish what you wish to achieve with your portfolio, over what timescale, etc.  You have to do this in the most tax efficient manner whilst using high quality investments

Using our expertise as independent Investment Managers we are able to create a bespoke portfolio tailored exactly to your needs.  This portfolio will be actively managed on your behalf and is typically held Offshore.

We are frequently in Israel visiting our clients. This gives us the opportunity to discuss their investments and ensure that their portfolio continues to be the most suitable to their ongoing needs.

Through our network of expert contacts in the UK and Israel, such as Financial Planners, Lawyers and Accountants, we are able to direct future Olim through the financial maze that they face.  In recent years we have helped many Olim to optimise their savings when making Aliyah.

Raymond James Investment Services Limited is the UK private client investment management arm of Raymond James Financial, Inc (‘RJF’) one of the ten leading investment services companies in the United States. Established in 1962, RJF is listed on the New York Stock Exchange and offers a comprehensive range of wealth management products and services to more than 1.6 million individual and institutional client accounts with total assets under control of approximately $180 billion (as of March 2007). RJF has 4,650 financial advisors in 2,200 locations throughout the United States, Canada, United Kingdom and overseas.

Our office specialises in the needs of those making Alyiah. We will help you organise your finances so they are structured in a tax efficient manner before you leave the country.  In addition, we continue the investment management of your funds whilst in Israel and will be regularly visiting you in your new home. This unique approach ensures that you will deal with the same person throughout your time in the UK and in Israel.

Whilst every effort has been made to ensure the accuracy of this guide neither RJIS, nor any connected company, accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of acting, or declining not to act, in reliance upon information contained in this document. Tax treatment depends on an investor’s individual circumstances, and may be subject to change. Before considering any action you should take independent professional tax advice.

For information on currency transfers for UK Olim Click here

Raymond James Investment Services
Suite 9, Arkleigh Mansions, 200 Brent Street, London NW4 1BJ
Email:  simon.benarroch@raymondjames.com
Tel:  + 44 [0]20 8202 1944: Fax:  +44 [0]20 8202 8019
www.RJIS.co.uk

Raymond James Investment Services Ltd is a member of the London Stock Exchange and is authorised and regulated by the Financial Services Authority.
Registered in England and Wales number 3669657
Registered office 77 Cornhill, London ECV 3QQ
Pershing Securities Ltd is a member of the London Stock Exchange and LIFFE and authorised and regulated by the FSA